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After initial scare, all eyes are now on ECB's stimulus plans

Sun, Oct 16, 2016 - 10:19 PM

[FRANKFURT] European Central Bank (ECB) chief Mario Draghi will be under pressure this week to clarify the bank's stimulus plans after investors were spooked by talk of an end to its massive bond-buying programme.

The ECB governing council is not expected to make any changes to its ultra-loose monetary policy at its regular meeting on Thursday, keeping interest rates at record lows.

But analysts will be listening for clues about the future of the bank's monthly 80 billion euro (S$122 billion) asset-buying scheme, after a Bloomberg report said policymakers were considering "tapering" - or gradually phasing out - the programme.

The ECB strongly denied the speculation but markets were rattled nonetheless, sparking a sell-off that pushed down bond prices in what more sanguine commentators dubbed a "taper tantrum".

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Far from winding it down, most analysts expect the central bank to extend the quantitative easing programme, which aims to encourage spending by pumping money into the economy, and is currently due to expire in March.

"There are some good reasons to believe that the ECB's work is not yet done," said Jonathan Loynes of Capital Economics. "Most obviously, while growth has stabilised, it is still distinctly lacklustre."

The ECB itself has repeatedly indicated that it is ready "if necessary" to continue with the corporate and government bond purchases beyond the March deadline.

But investors are worried the eurozone central bank could run out of eligible bonds to buy under its own self-imposed restrictions.

In a nod to those concerns, Mr Draghi last month said he had asked staff to look at possibly tweaking some of those rules.

Thursday's meeting "should come too early for any great breakthrough" on that front, said Carsten Brzeski, chief economist at ING-Diba. "Still, we expect ECB president Draghi to lift the veil a bit and open the door for an extension of QE beyond March 2017."

At its last meeting in September, the ECB again held its monetary policy fire and pleaded for patience to give its remedy of low interest rates, cheap loans to banks and the huge injection of liquidity a chance to work.

"The governing council has been firmly in wait-and-see mode," said Mr Loynes.

In a sign that the unprecedented stimulus may be delivering, consumer prices rose to a near two-year high in the 19-country euro area in September.

At 0.4 per cent, however, inflation is still far below the ECB's target of just under 2 per cent.

The ECB said in its most recent forecast that it expects inflation to reach 1.6 per cent by 2018 as the stimulus efforts pay off.

Most analysts believe the bank will hold off on announcing any fresh monetary support until a key meeting on Dec 8, when it will unveil its latest growth and inflation projections for the euro area which help guide its decisions.

That will also give it time to digest the outcome of the US elections in November, and a closely-watched Italian referendum in early December on constitutional reform on which Prime Minister Matteo Renzi has staked his career - both of which could cause economic turbulence.

Meanwhile, concerns over Brexit continue to weigh on policymakers' minds, with Mr Draghi last week warning that the uncertainty surrounding Britain's exit from the European Union, "clouds the outlook for growth".

"The ECB will probably want a clearer picture of the global political situation before making a decision on its monetary policy," said Bank of America Merrill Lynch economist Gilles Moec.